Is This Intel Corporation's Biggest Risk?

Every business faces certain risks, and management must disclose their biggest worries in annual and quarterly SEC filings. Today, I'll take a look at the biggest real danger I see in the latest risk recap from semiconductor giant Intel(NASDAQ:INTC). As an Intel shareholder myself, this is a topic of burning interest.

In the latest available Section 1A risk factors listing, Intel walks us through 26 different warnings. Some are mundane, industry wide, or even broader, like the stern look at climate change, or the need to attract and retain key personnel. Investors everywhere already worry about these ultra-generic issues, and I'm looking for something more specific to Intel this time.

On that end, Intel stares down a plethora of company-specific challenges. The company worries about monetizing its intellectual property portfolio, hackers stealing or damaging vital data, and misjudging production levels along the complex process of manufacturing microprocessors.

Even so, one warning stands out like a sore thumb...

A new chip factory under construction in Hillsboro, Oregon. Source: Intel.

No. 1 with a few bullets! At the very top of Intel's list of risk factors, you'll find this beast: "Changes in product demand may harm our financial results and are hard to predict."

Yes, indeed. And that's just the title of this risk factor.

Diving deeper into the enclosed paragraph of management's discussion, you'll find lots of thorns ready to poke a hole in Intel's business.

All of these issues can conspire to turn one of Intel's biggest business advantages into a costly problem. I'm talking about the company's network of in-house manufacturing facilities.

Intel helped invent the semiconductor as we know it, and continues to drive the state of the art forward. A generous portion of the company's $2.8 billion quarterly research budget goes toward improved manufacturing technologies. Intel puts these theoretical advances into action, too. Intel spent $11 billion on capital improvements last year, and almost all of these costs go toward building factories.

For a deeper look into the risks and benefits of running semiconductor factories, check out slides 14 through 23 of this handy slideshow.

Intel's dormant Fab 42 in Ocotillo, Arizona. Source: Intel.

How dangerous is this particular risk?You can imagine the pain Intel feels when its market predictions go astray. For example, Intel added a new facility to its Arizona campus in 2011 and pumped $5 billion into equipping this state-of-the-art manufacturing line. But the new factory was supposed to churn out desktop and laptop chips, and the market for these products kind of died in 2012.

Now Intel has a fully built, but only partially equipped, factory in Arizona, collecting dust until its services are needed again. Five billion spent for no immediate return. This is the downside of long-term planning and leading the market.

Intel just announced that parts of the dying PC market might not be terminally ill after all. The company hasn't promised to restart Fab 42 in Arizona, but that's a possibility if these trends stay intact. So the Arizona adventure is an instructive example of how Intel's biggest, baddest risk factor actually plays out from time to time. The risks are real.

This week's PC sales reversal is also a useful companion piece, because it shows how some short-term problems don't last forever. Some analysts speculated that Intel might want to sell Fab 42 rather than sitting out this production-less period. It looks like Intel made the right decision, after all.